Published on Africa Can End Poverty

The Impact of the Financial Crisis on South Africa

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When the storm hit, South Africa had been sitting on relatively strong fundamentals and emerging from a protracted period of economic expansion. The meltdown allowed “not-so-well-hidden” vulnerabilities to surface. Unemployment, inequality, poverty, crime, and HIV/AIDS still continue to plague the country. Agriculture, mining and manufacturing declined while the trade and current account deficit (CAD) widened. Household indebtedness reached worrying levels in a low-interest rate environment and inflationary pressures mounted. Moreover, severe energy shortages erupted (inducing blackouts) and a tense political climate resulted in President Mbeki’s resignation.

In months ahead, the sustainability of the CAD and the impact of the crisis on the real economy will remain the key issues. The financial account has so far been sufficient to finance the CAD, but sudden stops of capital inflows are not unheard of in developing countries during hard times. While the free-floating exchange rate rules out insolvency issues, financing the CAD will be much more difficult and costly; on the other hand, lower global demand will hurt South Africa’s export-sector and the falling rand is not expected to significantly counter the decline.

The crisis has also impacted the real economy. House prices have been declining, along with vehicle sales. Manufacturing production has slowed, the mining sector is shrinking further, and retrenchments are on the increase. Growth is expected to slow-down which is a risky proposition for South Africa and for Africa as a whole. Luckily, the sound fiscal position will somewhat cushion the economic slowdown.

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